Supreme Court overturns Court of Appeal in Delaware LLC case

The Supreme Court’s ruling in the case of Anson v Commissioners for HM Revenue & Customs [2015] UKSC 44 was published last week and has come as a surprise to many. The case addresses the question of whether double taxation relief can be claimed by UK taxpayers receiving income from a Delaware limited liability company (LLC) where they have already suffered US tax on that income.

Double taxation relief is generally available where the UK tax is computed by reference to the same profits or income by reference to which the US tax is computed. The US tax paid would be a credit against the UK income tax liability.

A Delaware LLC is treated as being transparent in the US and so the profits are taxed as income of the LLC members. However, in the UK HMRC practice has been to treat Delaware LLCs as being opaque, meaning that the LLC itself is taxable on the profits and the members are only taxable on the distributions made to them, in the same way a company is subject to tax and the individuals are then subject to tax on the dividends received from that company.

Mr Anson was a non-domiciled UK resident taxpayer and a member of a Delaware LLC. The LLC was classified as a partnership for US tax purposes and Mr Anson was subject to US federal and state taxes on his share of the profits. He remitted the balance to the UK and was subject to UK income tax on the amounts remitted. Mr Anson claimed double tax relief against his UK tax liability to take into account the tax he had already suffered in the US.

As the LLC was considered to be opaque in the UK, HMRC concluded that the income which had been taxed in the US was that of the LLC and the remitted income from the LLC should be treated as a dividend, rather than as partnership profits. This meant that the Mr Anson could not claim double tax relief for the US taxes he had paid personally because the income that had been taxed in the US was not Mr Anson’s income.

The First Tier Tribunal (FTT) found that the Delaware LLC Act and the LLC agreement between the members meant that the profits of the LLC belonged to the members, rather than the LLC itself, as they arose and so Mr Anson was entitled to double taxation relief. However, subsequent rulings by the Upper Tribunal and the Court Appeal disagreed with the FTT and held that the profits belonged to the LLC, such that no double tax relief was due.

This latest ruling by the Supreme Court has now concluded that the LLC should be regarded as transparent and that the income upon which Mr Anson was taxed in the US and the UK should be regarded as “the same income” in both countries, meeting the requirements of double taxation relief under the UK/US double tax treaty. Their conclusion agreed with that of the FTT; Mr Anson was entitled to the share of the profits allocated to him, rather than receiving a transfer of profits previously vested (in some sense) in the LLC. It therefore followed that the income arising in the US was his share of the profits and that it was the same income liable to tax under UK law, to the extent it was remitted to the UK.

Although it should be noted that the decision in Anson was based on the facts of the particular LLC agreement under review, individuals with income from Delaware LLCs who have previously had their claims for double tax relief refused by HMRC should now review their position in light of this ruling. The decision is less welcome for corporate members of LLCs, who would generally not be liable to corporation tax on profits until they were distributed. Distributions were also likely to have been exempt from tax at the corporate shareholder level. Based on the decision in Anson, company members of Delaware LLCs will be subject to tax on underlying profits of the LLC as they arise (with any actual distribution being ignored for tax purposes).

If you would like any further information about this case or to discuss the impact this may have on your tax affairs, please contact your usual Moore Stephens adviser.